Energy Reserves Contested in South China Sea

The conflict between Beijing and Hanoi over the energy reserves in the South China Sea, which had been simmering for a couple of months, entered a new phase when India’s ONGC announced going ahead with the exploratory drilling on the Vietnamese shelf regardless of the threats voiced by China. The South China Sea shelf supposedly holds 30 billion tons of crude plus 16 trillion cu m of natural gas, and the conflict over the lucrative reserves surfaced after China’s CNOOC opened an international tender to develop nine blocks in the marine zone stretching across 160,100 square kilometers.

PetroVietnam CEO Do Van Hau stated recently that the nine blocks are located deep within the Vietnamese continental shelf. As a result, the foreign ministry of Vietnam condemned the tender as an infringement upon national sovereignty, prompting a diplomatic spat between Hanoi and Beijing.

Beijing’s appetite for new energy reserves outside of its territory is largely due to completely reasonable concerns over the situation in the Middle East, the region supplying the lion’s share of the Chinese hydrocarbon import. As for Vietnam, it has been conducting energy explorations in the south China Sea for quite some time, with long-term licenses already issued to several foreign partners including ExxonModi and Gazprom. The Chinese CNOOC currently invites investors to blocks ##128-132 and 145-146, but it has to be taken into account that Gazprom started drilling works on four Vietnamese blocks in cooperation with PetroVietnam back in 2007, and in October, 2008 the Russian energy giant sealed a deal with Hanoi for the term of 30 years over blocks 129, 130, 131, and 132. Moreover, in April 2012 Gazprom and Hanoi reached an agreement to jointly cultivate license blocks 05.2 and 05.3.

China was late to step into the game but plays hard. In May, CNOOC launched its first deep-water drilling project in the South China Sea and designated the territory for an offshore platform worth around $1b. So far, China’s exploratory activities remain confined to the coastal zone, but its more ambitious plans are not deeply hidden.

It is clear that, on top of the conflict with Vietnam, China is headed for serious polemics with Taiwan, Malaysia, Brunei, and the Philippines which similarly can cite convincing foundations for claims to the disputed shelf. Brawls over the Spratly and the Paracel Islands are a long-standing tradition which survived recurrent attempts to overcome the discord. The last of such attempts was made on June 12, when China and ASEAN diplomacy chiefs pledged to formulate in the foreseeable future a binding legal framework to decide which country should own the islands. Beijing, however, announced the above tender on June 23, before the intention became reality, and the prospects for further dialog dimmed. Chances are China does not believe that an agreement with ASEAN, of which Vietnam became member in 1995, can materialize any time soon, while the Chinese energy needs simply can’t wait.

Every party to the dispute can draw arguments in its favor from the 1982 UN Convention on the Law of the Sea, which authorizes countries to extract natural resources within the respective exclusive economic zones, at distances up to 200 miles from their shores. With the legislation in mind, over 100 countries branded 200-mile zones as their assets, but those occasionally overlap, making conflicts imminent.

The only viable type of solution is compromise based on territorial exchanges or shared use of natural resources. Actually, Petrovietnam and China’s CNOC have a record of interacting in such a mode, as they implemented in concert energy projects in the northern part of the Gulf of Tonkin. Petrovietnam’s list of foreign partners counts around 60 entries, and, at the peak of the current crisis, Hanoi reiterated that Beijing is welcome, but only as a foreign investor on pars with others.

Chinese and Vietnamese ships were briefly locked in a standoff over the exploration blocks last year, and though no fatalities were incurred, the relations between the two countries were scarred by the incident. Information campaigns linked to the territorial problem raged on both sides as a parallel process, though Hanoi denies the very existence of a territorial dispute and continues to hold that there is absolutely no subject for one. China is known to exert pressure on some of the potential partners of Petrovietnam, though it must be noted that Russia’s Gazprom has faced none up to date. It came as a big win for China’s energy diplomacy that Beijing managed to talk BP out of the exploration projects in the South China Sea, but the US ExxonMobile did not choose to capitulate on the issue.

In the light of the above, the decision made by India’s ONGC to ignore the Chinese warnings and to stick to block 128 reads as an episode in the unfolding cold war over energy resources. Beijing sent a message to ONGC in 2011 that its exploratory activities on the Vietnamese shelf hurt China’s sovereignty and, accordingly, were seen as illicit in the country. Indian Minister of State for Petroleum and Natural Gas R.P.N. Singh told the parliament in May, 2012 that ONGC would scrap the South China Sea project as economically unfeasible, but a policy U-turn followed shortly. Still, the impression is that India is trying to mitigate the impact of the discord on its relations with China: in June, ONGC and China’s energy heavyweight CNPC inked a memorandum on exploratory activities in third-party countries, expanded cooperation in oil and gas processing, pipeline construction and management, etc. The deal can be interpreted as a form of exchange but may reflect far more strategic considerations.

Two key circumstances factor into the context. First, India and China quarrel chronically over a segment of the border in the Himalayas. Secondly, the West, Washington, in particular, is courting Delhi with a thinly veiled objective of convincing its leaders that India should take the role of a counterforce vis-a-vis China. It is likely that the decision made by the state-run ONGC to keep the block on the South China Sea shelf can be traced back to the Indian government rather than to the company’s own top brass, and was born under the pervasive US influence. National Energy Institute director S. Pravosudov, for example, asserts, with references to Iran, Sudan, Libya, etc., that the US deliberately destabilizes the countries supplying oil to China. The rule of thumb on the chessboard is to cause the opponent’s space four maneuvering to shrink, which, applied to China, means cutting the country off the energy supplies.

If the hypothesis is right, Washington can be expected to respond resolutely to any escalation putting the interests of ExxonMobile, the world’s biggest energy company, in jeopardy. President Obama, by the way, recently laid out a US foreign-policy vision with the priorities shifted towards Asia Pacific. Importantly, the US has military assistance accords with Japan and Taiwan, and the overall conclusion is that Washington will get involved in whatever diplomatic or military conflicts arising in the region.

It is also an easy guess that, if the conflict erupts, it will immediately spill beyond the South China Sea. Multiple cases exemplify the trend: the gas reserves discovered in the proximity of Israel’s shores were quickly contested by Lebanon. An Israeli air force commander then said that the zone to be defended was huge and the proper strategy was to build up the Israeli military presence across it, since the interests of the country were at stake and the government was fully aware of the challenge. France’s Tribune explained in this connection that Israel had to strengthen the military group in the region even before the development of the gas deposits started. Curiously, the marine area Israel prepared to safeguard made 44,000 km squared, that is, twice the territory of Israel.

In the meantime, another conflict over energy reserves is rolling on near Cyprus. Claims to the natural riches are staked by Turkey based solely on the existence in the region of the totally unrecognized Turkish Republic of North Cyprus.

As the older mineral reserves dwindle and the costs of bringing new ones on line climb, conflicts over them, at times armed, are growing completely routine, and downright seizures authorized by national governments occur with increasing frequency. The overall tendency is, therefore, that energy demand emerges as the driver of global politics.

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